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Government in no rush to reform umbrella companies

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Put the umbrellas away – no rush! At least, that’s the way it feels from the UK Government’s reactions to workers provided by umbrella companies. Ian Holloway looks at these reactions, the previous Call for Evidence and the long gap to the current consultation.

9th Jun 2023
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Maybe it’s just a case of putting the old umbrellas away and getting new ones out - but the government seems to be in no rush to introduce reforms in spite of the many scandals and underhand tactics from unscrupulous firms that have been reported over the years.

What is an umbrella company?

Simply, an umbrella company is an intermediary between the individual worker and the end client. It's a business model where the umbrella company employ workers who, by virtue of a contract of employment, become employees entitled to the benefits of employment. The end client pays the umbrella company, and the umbrella company pays their employees (through PAYE), deducting a ‘fee’ before the payment of net wages.

This is a very simplified description of an umbrella business model and not all umbrellas are the same.

What’s the Problem?

In response to the Good Work Plan in 2018, the UK Government committed to regulating umbrella companies. In November 2021, it finally published a Call for Evidence that looked at the role of umbrella companies in a changing labour market, generally welcoming their existence. Yet words such as ‘exploitation’, ‘tax evasion’ and ‘unscrupulous participants’ were all references to their awareness of and evidenced non-compliance with employment law, tax and National Insurance legislation. 

Harsh words for an underlyingly simple business model where compliance far outweighs non-compliance. Although, even this week I was made aware of an umbrella employee with evidence of the application of dubious employment law protections, to say nothing of an underpayment of the National Minimum Wage. 

The November 2021 Call for Evidence did show the UK Government’s intention to step in, though why did we have to wait until 6 June 2023 for the publication of the 400 responses

Latest umbrella company consultation, June 2023

On 6 June 2023, HM Treasury published the consultation ‘Tackling non-compliance in the umbrella company market’, which looks at three areas:

  1. Regulating umbrella companies for employment rights
  2. Tackling tax non-compliance in the contingent labour market, and
  3. Targeted options to address tax non-compliance

Employment Rights

Right at the very start of this section of the consultation, it is acknowledged that any reform of employment law would apply in Great Britain only, as this is a devolved responsibility to Northern Ireland. Thus immediately, we have the prospect of different rules in different parts of the same United Kingdom, something we are getting increasingly used to, yet something that makes compliance burdensome for employers.

There is also the acknowledgement that legislation takes time, and an Act of Parliament is needed before any operational Regulations can be made. Perhaps a hint there might be an intention to do something, though Parliamentary timescales mean the chances of this soon are slim.

The section concentrates on two options for defining an umbrella company:

  1. Making a clear differential between an employment business (a recruitment agency) and an umbrella company (an employer). Then, four recruitment ‘models’ are proposed.
  2. Setting three ‘conditions’ that an umbrella company must meet, none of which would limit the available engagement and payment methods, unlike Option 1

The defined umbrella company would then have to meet ‘standards’ which would be enforced. Here, mention is made of the previous commitment to establishing a ‘Single Enforcement Body’, announced in June 2021 but seemingly dismissed as only something that ‘may’ happen by the then-Secretary of State for the then-BEIS in a House of Commons committee in December 2022. Instead, enforcement could be by the Employment Agency Standards Inspectorate which could be incorporated into the single body ‘subject to there being sufficient Parliamentary time needed to legislate’.

Tax Non-Compliance

Whenever there is a reference to tax non-compliance, this refers to either known or perceived activities such as fraud and tax avoidance arrangements which impact the tax gap. The UK tax system, including National Insurance, is not a devolved issue, so measures would apply UK-wide.

The consultation proposes three ‘high-level’ options and seeks to understand the potential impacts; therefore, this section needs responses from employers, umbrella companies and workers:

  1. Ensuring that the end user of the umbrella company’s employees apply statutory minimum levels of ‘due diligence’ – that’s a potentially complicated list of all possible parties in the labour supply chain.
  2. Where HMRC are unable to collect the tax (and/or National Insurance) from the umbrella company, the suggestion that this debt liability could be transferred to another party in the supply chain, for example, the end-user of the services, although they are not the employer. This is similar to the transfer of debt rules that apply in some IR35/off-payroll instances.
  3. Moving the responsibility for the collection of the tax debt to the end user rather than the umbrella company. This is very like the IR35/off-payroll rules where the end-user becomes the deemed employer, though not the employer for employment rights purposes. The consultation is correct when it talks of the ‘disruption’ caused as end-users look at the relationship with umbrella companies (and vice versa).

Addressing Tax Non-Compliance

The ‘high-level’ options above are, perhaps, ones for the future. Chapter 5 of the consultation seems to look at specific measures that will tackle the perceived abuse of specific tax reliefs that could reduce the tax gap. The consultation seeks views on limiting the use (perceived abuse) of:

  • The VAT flat rate scheme and Mini Umbrella Company (MUC) fraud, and
  • Employment Allowance abuse, where a UK director would have to be in place for the whole tax year where the Employment Allowance is claimed. 

The consultation asks whether the roll-out of Making Tax Digital for VAT has bought accounting simplifications with the suggestion that the VAT flat rate scheme might overlap these. Also, note that any changes to Employment Allowance eligibility would affect all businesses that are currently eligible.

Responding and Summarising

There are questions in this consultation that could impact all employers, not just those that are umbrella companies or using them to engage workers. I would urge everyone to use the summer to respond to the relevant questions by 29 August 2023.

However, you do have to wonder whether any reforms are really something that will happen in this UK Government’s remaining term of office. It seems to me that there is simply not enough Parliamentary time left, given there needs to be engagement with a wide number of individuals. 

Is the current consultation all for the purpose of creating the impression that something will happen; something to place into a Manifesto perhaps?

It’s been raining since 2018 on this one, I feel there is more to come, so don’t put away your umbrellas yet!

Our editor Richard Hattersley debated the subject of contractors, umbrella companies IR35 in a recent Any Answers Live session back in November 2022.
 

Replies (8)

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By Farrukh999
12th Jun 2023 10:35

I bet some of these Umbrella companies must donate to the various political parties so there is no incentive to change.

Thanks (1)
Michael Bennett, Owner of Michael B Bennett Ltd
By Michael Bennett
12th Jun 2023 10:38

This simply exacerbates a persistent failure by government / HMRC to address the underlying IR35 issue. All it takes is a very simple piece of legislation which states that where a "client" has the onus of deciding whether an engagement is inside or outside of IR35, if it decides inside, then it MUST directly employ the 'contractor'. This does away with the need for umbrella companies, gives the individuals access to employment rights, and removes the nonsense of IR35 impact on small company accounts. Or perhaps government does not want things to be simple!

Thanks (3)
Replying to Michael B Bennett:
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By johnjenkins
12th Jun 2023 11:03

Or perhaps get rid of IR35 and let employment status be a commercial decision so HMRC have no say.

Thanks (7)
Replying to johnjenkins:
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By Jabba the Hut
12th Jun 2023 12:15

As Liz Truss wanted to do before she was hounded out by vested interesta

Thanks (3)
Replying to Jabba the Hut:
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By johnjenkins
12th Jun 2023 13:23

Those same vested interesta who shot down Liz growth plan and are now making oodles on the back of the rise of mortgage interest rates et al.

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By Daniel Richards
12th Jun 2023 10:40

Point 2 where the debt liability could be transferred to the Agency seems really unfair. An Agency 'should receive' a DD pack and weekly RTI reports. How much more can they do? Not many companies would be willing to show their bank statements.

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Replying to Daniel Richards:
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By ds
12th Jun 2023 13:24

Daniel Richards wrote:

Point 2 where the debt liability could be transferred to the Agency seems really unfair. An Agency 'should receive' a DD pack and weekly RTI reports. How much more can they do? Not many companies would be willing to show their bank statements.

If this goes ahead, which I doubt, the agency would then require the contractor or worker to take out insurance to protect the agency. This is a complete dog's breakfast to put it mildly.

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By ds
12th Jun 2023 13:22

Given the extended period of this consultation and the impending general election, possibly resulting in a Labour government, it is doubtful any of this is going to happen. If Labour are returned to power next time round, they would probably put an end to what they started under Blair, and drive the final nail into the coffin of small limited companies and get everyone signed up into PAYE. I cannot see flip-flop Starmer being an engine for change and entrepreneurialism.

Thanks (3)